Silver Takedown

And Assorted Conspiracy Theories ....

There was a 31% drop in the Silver price on Friday. Naturally, everyone focuses on the magnitude of the price fall. After all, who doesn’t look at an accident when they drive by? Before addressing whether that 31% drop marks the end of the Silver bull, we must recognize that lost in the noise of that drawdown are a couple of signals worth noting. The first bit of signal is the fall ocurred on Friday AFTER the Shanghai market had already closed for the weekend. With the Chinese Cat away, the New York mice could play - just like the old days, they had the run of the place. If you are like Bag, and believe the metals markets are heavily manipulated, then the timing of this fall makes perfect sense. Had this fall occurred on a Tuesday, we could instead blame some wet market trading desk in Wuhan, China. But no, this was all New York.

The second part of Signal was the price movement itself. There are rules in place specifically designed to minimize panic selling and thus prevent large price drops like this one. The rules dictate trading to be halted if prices fall by 10% within minutes. To sidestep the shutdown, the 31% drop had to be a slow & steady drip all day. Panic selling was not allowed, so as not to trip the circuit breakers - just a gradual 31% takedown. In Bag’s opinion, what we saw was a controlled demolition, obviously engineered and actively managed to avoid a halt in trading. For those who believe the price fall was organic, Bag wonders if you can even recognize a controlled demolition when you see it. For instance, is it possible to take a 747 Jumbo jet flying at 550 MPH, ram it into a skyscraper, and reasonably expect the building to collapse straight down?

On Monday of last week, two of the largest refiners on the planet, Valcambi & Metalor, both at the same time, stopped buying Scrap Gold & Silver. The reverberations of that decision were felt all the way down the food chain to local pawnshops & Coin dealers - who, in lockstep, also quit buying. In Bag’s hometown, there is a Metalor subsidiary. That location has had a line of people out the door looking to sell all day, every day, since November. The narrative given for them turning people away last week was that the refinery has reached capacity. Due to all the sellers, they have a 6-month backlog of scrap currently warehoused and waiting for the refining bottleneck to loosen up.

What Bag struggles to wrap his mind around is how exactly a backlog equates to not buying anymore scrap. The entire business model of PM refiners is to buy dollar bills for 90 cents each. That is a Gravy train with biscuit wheels, if ever there was one. Nobody in their right mind would ever willingly stop it. The narrative is, due to the backlog, all of their money is tied up. While the backlog is real, the idea that they have no money to buy more scrap is total Bullshit. This is not Uncle Joe’s backyard Refinery/Auto repair business. These are multi-billion dollar enterprises with ten-digit credit lines at the biggest banks on the planet. They don’t just run out of money. And yet, somehow, the spigot has been turned off.

Let’s take the narrative at face value and assume the refiners have used their entire credit line. If you run the refinery, don’t you just call the bank and get a credit line increase? There is no bank in the world that would look at your business, with a line of people out the door selling assets at 90 cents on the dollar, and say “No thanks, we don’t want any part of that.”

Any banker worth their salt would look at that situation and say “OK, we will put up the money, you do the work, we split 50/50.”

The Savviest bankers, like the kind they have at JP Morgan, would look at that situation and say, “OK, Mr Refiner, you get a third of the profit, I get a third, and the Money gets a third.”

Bag’s does have a contact at Metalor, whom we’ll call “DT” …. short for Donald Trump Deep Throat, has informed Bag that Metalor is indeed trying to increase its credit line. But DT says, “The bank is not cooperating because of the perceived risk.”

Bag says: “Don’t you guys just hedge as metal comes through the door, eliminating ALL risk?”

(For those interested, we recently penned an entire article on how hedging eliminates all risk & locks in guaranteed profit, linked here.)

DT responds: “Yeah, of course - but they are still refusing.”

Bag replies, “Wow, DT, it’s almost like the whole thing is rigged.”

This begs the question, why would a bank forego a piece of the pie and turn off the spigot? The way Bag sees it, there are only two possible explanations for the bank’s decision, and they both have very dark implications. By the way, if anyone can think of a third, Bag would love to hear it.

The first plausible scenario is that the banks perceive risk because the hedging mechanism in place for decades now - the futures market - will be collapsing. The Banks are in the best position to know before anyone else. In a world without a futures market, commodity supply lines would be irrevocably cut. Oil, Gas, Metals, and most importantly Food would have no path to market. Prices would 10x or more overnight, if you can even get them. Some of you might think this is hyperbole. It isn’t. As sure as we landed on the moon, this is what awaits us if futures markets collapse.

The second, and more likely theory, we will call the “Lone gunman bank Theory.” It centers on a subject Bag has written about for years. Namely, Several multinational banks are trapped on the short side in the silver market. They have been running a 40-year price suppression scheme, selling silver they didn’t have, and are now being forced to deliver. Of course, they don’t have it. One of those banks is UBS, the largest bank in Switzerland, which, wouldn’t you know, is where both Valcambi and Metalor are headquartered. Is it possible they are the “lone bank” for both refiners?

The reason that matters is that both UBS and the refiners have massive short positions in the futures markets. The refiners use it to hedge, and have a warehouse full of metal that would allow them to cover their shorts, in time. The banks do not. However, the existing credit line the refiners use is likely collateralized by the contents of that warehouse. The higher the spot price goes, the more margin $$ the refiners have to post to maintain their position. The financial drain of those margin calls would explain why refiners are not buying. Is it possible a lone bank with a massive short they can’t cover, lets call them UBS, is eyeballing those warehouses and thinking “that is our way out of this mess.” If they have to bankrupt a couple of refiners in order to cover their own ass, there isn’t a banker born who wouldn’t make that trade.

The price action in Silver and the behavior of the refiners over the next couple of weeks will really tell the tale. The 31% drop on Friday has freed up MASSIVE amounts of cash for the refiners that, until now, has been posted as margin. If the refiners use that cash to turn the spigots back on come Monday, maybe all is right with the world. If they don’t, and choose to keep that cash as dry powder in case metals go back up, we will know war has been declared between them and the banks. There is a delicious irony in the fact that if UBS is indeed coveting the contents of that warehouse, they need the price to go right back up. And they need it quickly - meaning days or weeks, not months, as that would allow refiners the time to clear the backlog and empty the warehouse.

Is Friday’s 31% drop the end of the Silver Bull Market? Bag thinks that is about as likely as 4 inches of neck tissue stopping a 30-06 round. Sure, in the coming week or two we will likely get some follow-through downside selling from longs (who are still sitting on huge profits). But make no mistake, the Banks will be in there covering. Long-term, there is no doubt that silver is headed much higher. The odds of a 40-year scheme being resolved by letting the price run for a few months are about the same as the Earth being flat, somewhere between 0 and 0.0 …..

Monday will be fascinating to watch. Silver closed at $125 in Shanghai Friday morning, before the New York takedown Friday to $85. Come Monday, when both markets are open, we will have a better idea which price is real, and which is, well, conspired.

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